Pension scheme an option for some retirees

Many retirees are in a position where they need to decide between taking a pension or a lump sum on retirement.

Workplace pension schemes may offer options of a lifetime pension, a lump sum or a combination of the two.

A part lump sum option also applies to members of the old Government Superannuation Fund Scheme and to people who have transferred a UK pension (under certain conditions). In addition, you can now use a lump sum to purchase your own annuity providing a regular monthly payment for life. In all these situations, the key question is "Should I take a pension or a lump sum?"

The answer will depend on your personal situation. The advantage of a pension is that it provides a known amount of income for the remainder of your life.

This helps take away the uncertainty of how long you are going to live and what investment returns will be.

If you live longer than the average person, the total value of the payments you receive will be more than the value of the lump sum invested (plus returns).

The key disadvantages with a pension are that you cannot access the capital sum invested, and if you die before the average life expectancy, any funds not already paid out to you will be forfeited.

To avoid these situations, you can invest a lump sum in a variable annuity which allows partial access to capital and has a residual value at the end of life.

The key factors for considering your options are your life expectancy - based on your health and family history of longevity - and your ability to access large lump sums if required. If you have a decent lump sum in addition to a pension or an annuity you may have the best of both worlds.

- Liz Koh is an authorised financial adviser. The advice given is general and does not constitute specific advice. A disclosure statement is free. Call 0800 273 847. For free e-books, see moneymax.co.nz and moneymaxcoach.com.